ICC GCD Performance Guarantee Paper
In 2011, the Basel Committee considered some early data from ICC and suggested that, at that time, the ICC Trade Register did not provide “sufficient analytical evidence for reducing the CCF in the risk-based approach below 20%.” This paper aims to provide such evidence.
ICC members active in trade finance have collected large scale data on the claim and drawing rates of Performance Guarantees (i.e. Bid, Advance Payment, Performance and Retention) and financial guarantees, showing very low drawing and pay out rates, due to the nature of these products which only pay out when there are failures in the underlying contract/agreement.
GCD members have collected similar data on the drawing rates of performance bonds and guarantees after the obligor has gone into default. This data shows higher but similar drawing rates, reflecting that even after a company defaults, most commercial guarantees do not need to be claimed as either the underlying contractual obligations have been carried out to the satisfaction of both parties to the commercial contract or the business ceases and both parties have come to a mutual agreement without a claim under the guarantee being enforced.
These data together support an average Credit Conversion Factor (CCF) of less than 10% which in turn supports the maintenance of a 20% downturn EAD when calculating Risk Weighted Assets for capital purposes.